Business rates: Another digital revolution about to happen

Main points

UK business rates are devolved, with different exemptions and reliefs in each country.

Sweeping changes to the business rates system in England are being considered.

Extending ‘Making Tax Digital’ to business rates will introduce new risks.

Donald Drysdale reflects on forthcoming changes to the administration of business rates.

Structure of business rates

UK business rates are a significant tax on non-domestic properties, and vary depending on where the premises are located. They are usually paid by occupiers of premises, but owners of empty properties may be liable. The liability for a property is determined by multiplying its rateable value by a ‘business rates multiplier’ (or ‘poundage’ in Scotland) expressed in pence per pound of rateable value.

A property’s rateable value is set periodically by the Valuation Office Agency if the property is situated in England or Wales, by the Assessors if in Scotland, or by Land and Property Services if in Northern Ireland. Typically rateable values are re-assessed every five years or when premises are altered. The next periodic revaluations in England, Scotland and Wales will take effect in 2017; no date has been set for Northern Ireland.

Business rates are devolved to Scotland, Wales and Northern Ireland. Business rates multipliers are set independently for England, Wales, Scotland and Northern Ireland, with a special multiplier for premises in the City of London. The multipliers tend to increase each year, thereby increasing the amount of business rates payable.

Local authorities (‘billing authorities’) collect business rates: in two-tier areas in England, this function falls to district councils. Under England’s Business Rates Retention Scheme , the rates are partly pooled by central government and redistributed, and partly retained by billing authorities – giving councils financial incentives to grow their local economies.

In Scotland and Wales, the business rates collected are pooled at the devolved level and redistributed to the billing authorities via needs-based formulae. Scotland’s Business Rate Incentive Scheme encourages councils to grow their business rates.

In Northern Ireland, the Northern Ireland Executive and the district councils set separate rating multipliers, with the combined business rates liability collected by the councils.

Reliefs

Various exemptions and reliefs, both mandatory and discretionary, are available – differing from country to country within the UK – and organisations may need to plan to use these to best advantage. Limited powers also exist for local authorities to set supplementary business rates.

Properties exempt from business rates throughout the UK include farm land, farm buildings and fish farms. Places of public religious worship (including church halls) and buildings used for training or welfare of disabled people are also exempt, except in Scotland where a relief for these can be claimed.

In England there are specific reliefs for small businesses, rural businesses, charities, empty premises, and businesses in enterprise zones. Similar reliefs exist in Scotland, where there is also a relief for organisations generating renewable energy.

Wales has no specific relief for rural businesses. Welsh councils can grant hardship relief to businesses if this is in the interests of the local community. A temporary New Developments Scheme exempts new-built, vacant commercial premises for eighteen months following completion before 1st October 2016. Most commercially available self-catering properties in Wales are subject to business rates.

In Northern Ireland, reliefs exist for manufacturing businesses occupying qualifying industrial properties (‘industrial derating’), certain sports and recreation facilities, qualifying residential homes, small post offices, and hole-in-the-wall cash machines (ATMs) in rural areas. Hardship relief can be claimed to help a business recover from a temporary crisis (financial or otherwise) as a result of exceptional circumstances.

Devolution creates an element of tax competition in the UK, and the rules for calculating business rates are changed from time to time. In England, for example, small business rates relief will double from 1 April 2017, giving 100% relief for a one-property business with rateable value below £12,000 (currently £6,000) and tapering relief for a property up to £15,000 (currently £12,000). From the same date, the reduced ‘small business multiplier’ will apply to properties with rateable value between £15,000 and £51,000.

By comparison, Scotland’s small business bonus scheme (to be retained until at least 2021) provides 100% relief to a one-property business with rateable value of up to £10,000, and a measure of relief to a business if the aggregate rateable value of all its business premises in Scotland is £35,000 or less.

Changes in the wind

The government is exploring sweeping changes to the business rates system in England, explained in a consultative paper published in March. This examines ways of introducing more frequent business rates revaluations, at least every three years, to help businesses and stabilise local authority funding – an approach strongly supported by the CBI in an earlier round of consultations.

The latest paper also examines the possibility of introducing self-assessment for business rates, including self-assessment of rateable values, and considers whether a formulaic approach might be used to streamline the preparation of valuations. The Valuation Office Agency (VOA) at valuationdiscussiondocument@voa.gsi.gov.uk is inviting responses by 8 July 2016.

England’s business rates billing and collection are to be transformed. By 2022, local authority business rates systems will be linked to HMRC’s new digital tax accounts, allowing businesses to manage their rates bills in one place alongside other taxes – although it is unclear whether this will become mandatory. As a first step, business rates bills will be standardised across England to give ratepayers the option to receive and pay bills online by April 2017.

Once local authority and HMRC systems are linked, the government will consider the feasibility of replacing small business rates relief in England with a small business rates allowance applied to a business’s total property portfolio across English local authority areas, thus allowing businesses that grow and acquire more property to benefit from relief.

In the meantime the Scottish government has set up a review to explore revenue-neutral options for improving the business rates system in Scotland to better support business growth, and this is expected to report by summer 2017.

Making rates digital

Business and their advisers have grave concerns already about the government’s far-reaching proposals for Making Tax Digital. These seem likely to impose huge administrative burdens and costs on businesses – particularly small businesses – while introducing risks that they will be penalised unfairly for shortcomings in compliance.

Extending this digital revolution to encompass a wholly new online system for self-assessment and payment of business rates might multiply the costs and risks inflicted on some businesses. While more frequent revaluations might benefit some businesses, the additional compliance burdens could be bad news for smaller businesses – many of which would have to self-assess even to establish that no rates were payable.

A project that seeks to connect HMRC and multiple billing authorities with businesses and their agents could involve significant risks and uncertainties. Many large scale public sector IT projects have notoriously finished late and over budget while falling short of their objectives, while others have been aborted before reaching the finishing line.

It remains to be seen whether the devolved administrations in Scotland, Wales and Northern Ireland will wish to follow England in what has been described jointly by the Financial Secretary to the Treasury and the Minister for Local Government as a move “to provide a business rates system fit for the twenty-first century.”